The Fremont Group

Every business owner “owns” a “system.” It is a system that converts market demand for their goods or services into cash. Our Success Partners have “been there and done that.” Together with you they design and implement an “Operating System” for your business. The Operating System brings structure, stability, and mature management to the business. At a minimum it includes:
• creating standards of required performance and proper reporting in all areas (sales, operations and administration) so that proper and meaningful delegation can take place and employees can be properly held accountable for pre-determined results;
• control of the money including a budget that interfaces with pricing strategy, cash flow projections that bring sanity to AR and AP decisions, and implements proper use of debt and capital so that profit is budgeted and cash retention is accomplished;
• a consistent schedule of reporting/meetings with sales, operations, and finance so that things don’t “slip through the cracks” and the development of a responsible management team to shoulder responsibility;
• and a time management component so that the owner is focusing on what really matters rather than feeling constantly “stressed out” and unable to do his or her job which is really running the company.
Of course, every company is unique with different strengths and weaknesses. The Success Partner first surveys and gets to understand you and your business so that a tailored Action Plan can be developed with the owner. Then an implementation plan is developed so that the pace of change matches the ability of the company to assimilate the improvements and to be assured that it can be budgeted into the company’s cash flow.
But it is a two-way street. To be successful, The Fremont Group can only work with small business owners who are truly committed to change. The process is at its’ best with three types of owners: (1) The stressed owner who knows that his company is underperforming but simply doesn’t have control; (2) the owner who is contemplating transition—either to a family member or employee, prepare the business for sale or just to reduce the amount of time and stress that is now required; or (3) the owner who recognizes that he has not realized his potential and that he or she is not where they thought they should be by now.
Depending upon the desired result, the process can take weeks, months or years. The Fremont Group generally works in scheduled half-week sessions with regular contact and established benchmarks in between on-site work. Your Success Partner becomes an integral member of your advisory board of directors and a person that an owner can talk to, learn from and share their success with. Are you ready? Let’s talk.

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On TFG’s Linkedin page, we recently commented on a kickstarter campaign which crashed and burned violently. Worst of all, the project could easily have been a success if only a few key actions had been taken.
Summary: The project was an affordable espresso machine for the home market. Founders just wanted to crowd fund a small production run of 50 units to be made by hand. In pricing the product, the founders discounted their labor to zero. When posting their project, they did not restrict the number of units which could be ordered. In the end, they found themselves on the hook for producing 2000 units. The project collapsed because the cost of creating and perfecting a factory production process was too high. No units were ever shipped.
Their key failing was not seeking advice on their plan from trusted advisors. At the outset, it would be easy to see the project could easily spiral out of control if demand exceeded the 50 units which could be produced. Thus exposing the project’s weaknesses before anything negative happened.
No matter how long you’ve been in business, there’s no excuse for this type of oversight. If you want an honest assessment of your business or strategy, schedule a free webinar with TFG. We’d love the opportunity to earn your trust.

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The Fremont Group is a non-profit organization with the mission to support small business owners. Persons who are familiar with SCORE, an agency established by the SBA to do much the same, is therefore familiar with us—with one difference. The Fremont Group can stay with you and provide much more intensive assistance than SCORE. To meet us, try a customize webinar. Contact us and together we will pick an issue. The issue could range from sales and marketing, to operations, to employee productivity, to cash flow forecasting, to creating and using your budget. Then we will develop a webinar customized for you to address this issue. Like what you hear and we can come in for a day and do a Business Assessment creating an Action Plan to take you to your next level. Best of all—the webinar is free! We want to help you—let us! Give us a call at 303 338 9300 today to talk about it—talk is cheap!

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There is a Starbucks in your neighborhood—I know that because there’s a Starbucks everywhere. Walking by that Starbucks are two people. The first is a homeless person. He has 5 one-dollar bills, 3 quarters and a dime in his pocket. He looks into the Starbucks, sees the $4 cup of coffee and says to himself, “I really want that $4 cup of coffee but I don’t need it” so he walks on. The second person is a suburban house wife. She has lots of cash in per purse lots of money in her checking account. She looks into Starbucks and sees the same $4 cup of coffee and says to herself, “I need that $4 cup of coffee.” She goes in and buys it. Your business might be doing over one-million dollars a year in revenue. Unless you are a drug dealer you cannot imagine what that $1,000,000 would look like piled up on your desk. All you know is that you have a lot of money but you are frugal and only buy what you need. The problem is this: The difference between a want and a need is the balance of your checkbook and you can’t even really imagine how much money that you have! We all know people who as their income increases their expenses go up even faster. The cell phones, video games, big screen tvs—all those things that they only want they now think that they need and only because they have more income. You cannot run your business based upon what you want or need you must run your business based upon what you can afford!

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The Fremont Group can now refer to you a financing program that will allow your client to finance your consulting project and their other needs. 48 hour response and 80% approval! Whether its working capital, unsecured finance, term loans, revenue loans, equipment finance, SBA, retirement funding or custom funding packages, your clients will receive fast approval and rapid funding. Many of your clients will qualify for multiple funding opportunities giving your clients their choice of options. We recognize the need for you, the advisor, to help guide your client/borrower in their selection of the type of financing best suited to the clients’ situation. Your clients depend on you for advice, strategy, compliance and planning and you may very likely be responsible for helping to pick one of the several options that will be offered. Their dedicated staff will assist you and your client in choosing the best funding or financing option.

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In today’s banking environment, a significant percentage of potential borrowers are turned away by their banks at a time when either opportunity presents itself requiring capital investment, or available cash resources are insufficient. In either case, the potential borrower is left to fend for themselves. We endorse and will refer you to Cascade Pacific Capital, LLC. Whether its working capital, unsecured finance, term loans, revenue loans, equipment finance, SBA, retirement funding or custom funding packages, you will receive fast approval and rapid funding. Many of your clients will qualify for multiple funding opportunities giving your clients their choice of options. The Fremont Group will work with you through this process.

You will receive “real time” status of your progress including approval amounts and requirements to keep things on track. The system also provides real-time visibility of all important correspondences and communications throughout the process including calls, voice mails, faxes, messages. A Senior Funding Specialist will be assigned to you and to assist and educate you through the process.

Within 48 hours of submitting the completed application and documents, you will issue a prequalifying approval. Final approval is normally made inside 5 business days although certain loans like SBA loans can take substantially longer.

Contact The Fremont Group at 303 338 9300 to discuss your financing needs.

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Consulting firms who want to post a case study must complete on of our two standardized forms dependent upon whether or not the client has waived confidentiality. Contact us at 303 338 9300 or by email at admin@tfginfo.org to post your case study. Use the same format to contact this consulting firm about similar issues.

The Fremont Group works extensively with franchise owners. In a recent engagement they encountered a franchisee who, despite being in the franchise’s top quarter of producers, had been losing money for the past year. The initial assessment showed that morale among employees was very low; theft had occurred but not acted upon; their volume had significantly fallen off after their purchase one year prior; and three of the four owners had very little confidence in the fourth who handled the daily operations.

The Fremont Group immediately implemented actions to improve morale and terminate the employee who had been stealing. Communications were significantly improved and employees were given a daily “focus point” for their work. A monthly meeting was implemented to reward good performance and to obtain their “buy in” to improvement. The managing partner was evaluated and found to be competent but not a strong “leader” in part because of his age and also due to the family situation that he faced on his board. The company had no real concept of how their financial statements worked so sessions were done to teach them what they mean and to create key profit variables that they would track in a flash report. This was implemented but two larger problems emerged: (1) the four owners were all family members and had a very difficult time putting aside their “baggage”; and (2) the accounting upon which the flash reports were based was extremely inaccurate.

Counseling the owners improved their ability to function. They communicated better and were able to put aside some of the family issues. Unfortunately, the partner responsible for accounting (also the daughter of one owner, sister of another, and sister-in-law of the managing partner), simply was not capable of producing accurate statements. Both the managing partner and the accounting partner were being paid in excess of what the company could pay to have their services performed by third-parties—but this was in part why the four of them bought the business to begin with!

Recommendation: Significantly cut the hours of the managing partner, pay him hourly, and have him complete the essential functions that the current employees could not perform. Terminate the services of the accounting partner and contract for them at market. These actions will reduce the overhead of the company to a level where profitability can be achieved. All four partners must then cooperate to implement a marketing plan.

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This document is a basic primer for business owners with no accounting background (or particular aptitude!) Have your own Income Statement and Balance Sheet in front of you while you read this. Pick out the different parts on your statement as they are presented.[1]

Your financial statements

A company keeps two basic financial statements—an Income Statement (also known as a Profit & Loss Statement or P&L) and a Balance Sheet. These should be produced internally for your review at least monthly. To understand the difference between the Income Statement and a Balance Sheet look at a photograph on your wall. What do you see when you look at that picture? You see the “things” that were in front of the camera lens at the moment that the picture was taken. Imagine that instead of a camera the photographer had had a video recorder. What would you see then? You would see the “activity” that took place during the period of time that the camera was on. Your Balance Sheet is the photograph; your Income Statement is the video.

Balance Sheet

The Balance Sheet is a summary of the things that your company owns (things including debt) at a particular moment. It can change the next moment if you sell something that you own or bring in more “something.” The Balance Sheet has 3 parts: Assets; Liabilities; and Shareholder’s Equity. Assets are anything that you own. Liabilities are anything you owe. Shareholder’s Equity is a subtraction problem. Imagine that you have a house worth $250,000 and a mortgage of $200,000. What would be your equity? $50,000. You obtain this by subtracting the value of what you have from what you owe on it. This is how your Shareholder’s Equity is obtained. It is as “real” as the equity in your house. The report is called a Balance Sheet because it has to “balance.” In other words, the Assets minus the Liabilities equal the Shareholder’s Equity. Conversely, Shareholder’s Equity plus Liabilities equal Assets. It “balances.”

Your Assets and your Liabilities are sub-divided into two parts—Current and Long Term (or Fixed). An Asset is anything that you own. A Current Asset is an Asset that in the normal course of business would be converted into cash in the next six months.[2] Current Assets will include: Cash (obviously cash is already “converted” to cash); Accounts Receivable[3] (you will collect your AR from your customers in the next six months); Inventory (you will convert it into product which will sell); and you might have one or two other categories. The total of your Current Assets indicates how much cash your company will have to use in the short term.

A Fixed Asset or Long-Term Asset are those things that you own that in the normal course of business would not be converted into cash—desks, chairs, computers, trucks, equipment, etc. Most of these Assets are not sold, rather they wear out and therefore each year your accountant lowers their value. This is depreciation.[4]

A Liability is anything that you owe. A Current Liability is a debt that you have to pay in the next six months. A Long-Term Liability is a debt that you don’t have to pay in the next six months.

Who Cares?

You should care because the Shareholder’s Equity is akin to the equity in your house. It is the “book value” of your company. One of your objectives should be to increase the Shareholder’s Equity of your company. Other than yourself (and shareholders) there are three other people who care—buyers, bankers and bonders (the three B’s). Potential buyers care because your Balance Sheet details the things that they are buying. Bankers care because it gives an indication of whether or not you can repay a loan (see Current Ratio). Bonders care because they need to make sure that you are solvent enough to complete a bad project.

Current Ratio

If you take only one thing away from this discussion of your Balance Sheet, learn to understand your Current Ratio. Review our definitions above. One category indicates how much money your company has scheduled to come in during the short-term. Another category indicates how much money your company has going out in the short-term. The Current Assets show the money coming in[5] and Current Liabilities shows the money going out. To calculate your Current Ratio, divide your Current Assets by your Current Liabilities. Obviously we want to have more money coming in than going out (and so does a bank before they lend you money!) Therefore if you divide your CA by your CL you want the quotient (answer) to be greater than 1.0. If it is a decimal below 1.0 then you have more money going out than coming in—this is one of the tests of insolvency. In most companies a Current Ration of 1.5 to 2.5 is best but it varies so be sure to discuss this with your consultant. Although your bank will not tell you this, your Current Ratio can also be too high. As a business owner you would prefer to have a lot of Fixed Assets as these are the things that make you money. Equipment, trucks, computers, etc are tools that drive the business. You really don’t make money off of Current Assets—cash, receivables, inventory, etc. However banks want to see a lot of Current Assets (very high Current Ratio) to assure them that their loan payment will be made.

Income Statement

Most people pay more attention to their Income Statement because at the bottom it shows your profit or loss. We all know that we want profit so we look there first. As the Balance Sheet is divided into three parts, the Income Statement is divided into four[6] parts: Sales (or Revenues, or Income); Cost of Goods Sold (or Direct Costs); Overhead (formerly General & Administrative Costs); and Profit (or Loss).

Most small businesses keep their books internally. They make entries with each transaction and classify them according to the type of expense or income. Their program then automatically generates the Income Statement and Balance Sheet reports. Unfortunately GIGO applies—garbage in; garbage out. The reports are good enough for your accountant to take the data and do your taxes but generally not good enough for managerial purposes.[7] After we explain your Income Statement, you will understand some of the managerial purposes that it can serve if it is properly structured. As the transactions are entered they are placed on the reports according to your Chart of Accounts. Your Chart of Accounts determines which of the sections of your Income Statement or Balance Sheet the transaction is found. If you Chart of Accounts is inaccurate, your financial statements will not help you run the business.

Your Income Statement is not developed by the computer—it is built through your actions. This is a critical concept. Every time that you make a sale or pay bills, your are “building” your Income Statement.

REVENUES = the total amount of all of the invoices that you give to customers.[8]

COST OF GOODS SOLD = the direct cost of providing the good or service—the things that you bill the customer for. Included are the Labor, Materials and other costs that you would not have if you did not do the job (or make the sale). In a sense Direct Labor is a good thing—you have paid someone to produce your product which you sold to make money.

MARK UP = is the amount that you have charged your customer in excess of what it cost you to produce it. This amount is then applied to Overhead and Profit.

To summarize, every job (or sale) you make pays the cost of producing the product or service (COGS), allocates some of the mark up to overhead and some of the mark up to profit.

Your Chart of Accounts must put each transaction in the proper section. Labor for example must be divided between COGS and Overhead. A company without an accurate Chart of Accounts cannot properly price their product.[9]

As I have shown, your Income Statement is “built” through your transactions. It is produced in the following format:

REVENUE

– COGS

GROSS PROFIT (subtract COGS from Revenue)

– OVERHEAD

NET PROFIT

Your Overhead is your fixed costs. These are expenses that you will have even if you don’t make a sale. (The expenses that you have because of the sale are COGS.) Your GOGS is a percentage of the Revenue. Your Overhead is fixed. Gross Profit is the amount of each dollar that comes in that you are able to spend on Overhead and Net Profit. For example if you sell a product for a dollar that costs you 50 cents, you have a gross profit of 50 cents or 50%. You now have that 50 cents to apply to Overhead and Net Profit. Since your Overhead is a fixed amount, your break even is the number of 50 cents you have to bring in to pay that fixed overhead. If your overhead is $100 it takes $200 of sales to break even.[10]Therefore your break even is your fixed Overhead divided by your Gross Profit percentage. Knowing your break even is not optional—how else can you develop a rational sales and marketing plan? And without accurate numbers how can you determine your pricing structure?

Budget and Cash Flow

Your Income Statement is used to develop your Budget. Your Budget tells you what you can afford; your Cash Flow Forecast tells you when you can afford it. The Budget is critical in pricing and in developing excess-profit based incentives for your employees. Your Cash Flow Forecasting is how you run your business. You need to have developed a six-week cash forecast that shows your expected cash balances at the end of each of the next six weeks. There are virtually no generic software programs which adequately budget or project cash flow.

Profit Plan

There are four “expenses” that have to be paid out of Net Profit. Therefore each company has a certain minimum, mandatory percentage of profit that they require in order to remain viable. The net profit must be enough to pay: (1) your debt service; (2) new asset purchases; (3) the amount of cash you plan to retain; and (4) your taxes. The funding of your Profit Plan for these four items is for break even purposes just another expense.

Summary

In order to have financial control of your company you must have an accurate Income Statement, Balance Sheet, Budget and Cash Flow Forecast. These are tools required for Pricing, Sales and Marketing Plan, Employee Accountability and Incentives, Cash Management, and other managerial uses.

[1] You may notice that in some cases your statements may not match the presentation. These are adjustments that should be made in your chart of accounts. Until these adjustments are made, much of the analysis of your financial statements is impossible.

[2] Much of this document is an over-simplification. It is accurate enough for our purposes.

[3] This assumes that you are keeping your books on an accrual basis and not on a cash basis. Your internal books should be kept on an accrual basis as this more accurately shows your true financial position. You can keep your internal books on an accrual basis for your management and allow your accountant to file your taxes on a cash basis which is often more advantageous. The difference is when you post income and when you post expenses. On a cash basis you post income only after you have the cash and post expenses only when you pay them. On a cash basis you would not have AR or AP. In an accrual basis you post income when you have earned it and expenses when you incur the obligation. This creates AR and AP.

[4] Note that the government allows you to “expense” your depreciation. This means that you are able to reduce your income by the amount that your assets reduce in value. (In reality there are tax schedules that dictate how fast your Fixed Assets “wear out” or in other words how much of a deduction you are allowed to claim for tax purposes.) This creates a “book value” for your asset which is often different from the “market value” and is almost always different from the value of the asset to your operations. For example, a truck might depreciate over 5 years. This would allow you to deduct one-fifth of the value of the truck each year from your Income Statement for tax purposes. On your Balance Sheet the value of the Fixed Asset would reduce by one-fifth each year until it reached zero after five years. Obviously the truck would still have “market value” (you could sell the truck for something) and obviously the truck would have value to your operations, but for tax and Balance Sheet issues, it would no longer have any value.

[5] This ignores your operations and just gives you the current status.

[6] In some instances it is appropriate to add a fifth part to segregate selling costs.

[7] The best analysis of this is found in “Minding My Own Business” by Dirk Dieters available on The Fremont Group web site from the publisher (best price) or on Amazon.com. The relevant section discusses “managerial accounting.”

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A reminder to landscape contractors in Oregon—“Minding My Own Business 101” is certified for 20 continuing educational credits—enough for your full allotment. Call us today for details. The State of Oregon’s approved course list can be found here (it’s a PDF download).

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The Fremont Group is a non-profit organization providing small business management consulting and coaching. Founded by Dirk Dieters the company is selective in their client base. They develop long-term relationships with business owners Working with a network of retired consultants across the country, the firm only works with owners who are committed to change. As a non-profit their fee structure is significantly lower than for-profit firms.

The Fremont Group offers educational programs including those based upon “Minding My Own Business” a book written by Mr. Dieters. They offer an on-line course that is certified for Continuing Education credits in some states, a webinar series each fall and the library of information that is available on this site.